EXPANDED ACCOUNTING EQUATION:

ASSETS = LIABILITIES + (CAPITAL - WITHDRAWAL) + REVENUE - EXPENSES)

Analyzing Business Transactions: Revenue and Expense accounts

Revenue and Expenses = directly affect owner's equity. If a business earns revenue, there is an increase in owner's equity. If a business incurs or pays expenses, there is a decrease in owner's equity.

For the present, think of it this way: if the company makes money, the owner's equity is increased. On the other hand, if the company has to pay out money for the costs of doing business, then the owner's equity is decreased.

Revenues and expenses fall under the umbrella of owner's equity: revenue increase owner's equity; expenses decrease owner's equity.

What are Revenue, Expenses, and Profit?

Every business exists primarily to earn a profit. This profit is realized through revenue earned by an organization as a result of the sale of a service or product by that business.

Revenues - Are the amounts earned by a business. Examples of revenues are fees earned for performing services, income from selling merchandise, rent income for providing the use of property, and interest income for lending money.

Revenues - May be in the form of Cash and Credit Card Receipts like those from VISA and MASTER CARD.

Revenue - May also result from credit sales to charge customers, in which case cash will be received at a later time.

Recording Revenue
If revenue of $550 is received by the business, this revenue should be recorded as an increase Cash of $550 and resulting increase in proprietor's capital of $550. Revenue may be received in forms other than cash. An organization may receive payment for services rendered in the form of other assets such as supplies, equipment, and even someone's promise to pay at a future time (accounts receivable). The effects of the accounting equation will still be an increase in the specific asset received and a corresponding increase in capital.

Expenses - Are the costs that relate to the earning of revenue (or the costs of doing business). Examples of expenses are wages expenses for labor performed, rent expense for the use of various media (for example, newspaper, radio, and direct mail).

Expenses - Maybe paid in cash when incurred (that is, immediately) or at a later time.

Expenses - To be paid at a later time involve.

Recording Expenses
Every business, regardless of its nature, must incur certain costs in order to operate. These costs are known as expenses. Expenses are generally referred to as the "costs of doing business." Examples of business expenses are rent expense, insurance expense, salary expense, and supplies expense.

Profit - An excess of revenue over expenses.

ACCOUNTING CYCLE

STEPS IN ANALYZING TRANSACTION

1. Read the transaction to understand what is happening and how it affects the business. Example, the business has more Revenue, or has more Expenses, or has more Cash, or Owes less to Creditors.
2. Identify the accounts involved, and decide whether the accounts are increased or decrease. Look for Cash first; you will quickly recognize if Cash is coming in or going out.
3. Decide on the Classifications of the accounts involved. (for Example, Equipment is something the business owes, and it's a liability; Rent is an Expense.
4. After recording the transaction, make sure the accounting equation is in balance.

THE FIVE CLASSIFICATIONS:
Accounts Category Normal Balance Increase Decrease
1. ASSETS DEBIT DEBIT CREDIT
2. LIABILITIES CREDIT CREDIT DEBIT
3. OWNER'S EQUITY
CAPITAL CREDIT CREDIT DEBIT
WITHDRAWALS DEBIT DEBIT CREDIT
4. REVENUE CREDIT CREDIT DEBIT
5. EXPENSES DEBIT DEBIT CREDIT

STEPS IN THE ACCOUNTING PROCESS
1. Record the transactions of a business in a JOURNAL book of original entry - the day - by day record of the transactions of a firm). Entry should be based on some source document or evidence that a transaction has occurred, such as an invoice, a receipt, or a check.
2. Post entries to the accounts in the LEDGER. Transfer the amounts from the JOURNAL to the Debit or Credit column of the specified accounts in the LEDGER. Use a cross reference system. Accounts are placed in the LEDGER according to the account numbers assigned to them in the CHART OF ACCOUNT.
3. Prepare a TRIAL BALANCE. Record the balances of the LEDGER accounts in the appropriate Debit or Credit column of the Trial balances form. Prove that the total of the debit balances equals the total of the credit balances.
RECORDING BUSINESS TRANSACTION
To repeat Business transactions are events that have a direct effect on the operations of an economic unit or enterprise and are expressed in terms of money. Each business transaction must be recorded in the accounting records. As one records business transactions, one has to change the amounts listed under the headings Assets, Liabilities, and Owners Equity. However, the total of one side of the fundamental accounting equation should always equal the total of the other side.
SUMMARY OF TRANSACTIONS
Summarizing each individual ledger account and listing these accounts and their balances to test for accuracy in recording the transactions.
1. Name of the company
2. Title
3. Date
4. Account Name (In order - Chart of Account)
5. Two Column Debit - Credit
CHART OF ACCOUNTS
A numbering system of accounts that list account titles and accounts numbers to be used by a company.
Before recording transactions for new business, the accountant must first think of all the possible types of transactions that the company will carry out. Based on this variety of possible transactions, the company's accountant makes a list of account titles to be use to record the company's transactions.
Chart of Account - Is the official list of the ledger accounts in which transactions of a business are to be recorded. Assets are listed, Liabilities, Owners Equity, Revenue, and Expenses.
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Owners Equity

Owners Equity - represents the amount owed to the owners by the company. It is calculated by subtracting Liabilities from each side of the accounting operation. Owners Equity also represents the net asset of the company.

Ownership - Is the exclusive right to posses, use, enjoy, and dispose of property.

Equity - Is the owners' contribution to the business. It is represents the noncurrent obligations of the entity to the owners,. Because equity equals the amount of assets remaining after subtracting liabilities, equity is sometimes called net assets. (The term 'net' indicates that at least one amount has been subtracted from another to reach this final amount.) Equity comes from two primary sources investments by owners and earnings. An unincorporated business (sole proprietorship or partnership) will be illustrated first. Equity is equal to the owners' investments plus net income, less any withdrawals and net losses.

Capital - The owners' current investment, or equity, in the assets of a business.

Drawing Account - A temporary capital account, set in the name of the sole proprietor or a partner, from which he or she can withdraw money or other assets in anticipation of profit.